Red Cross (IFRC) Review of the internal control system. PwC

Transcription

1 Red Cross (IFRC) Review of the internal control system PwC 25 March 2014

2 Table of contents 1 Executive summary 1 2 Background Assignment Approach and methodology Method10 3 The Red Cross Movement About the Red Cross Movement About the Federation (IFRC) About the member organizations 11 4 Constitution and Rules and Procedures Rules of Procedures Financial regulations 14 5 IFRC Financial Management systems General Overview financial systems 16 6 General descriptions of procedures and routines Agreements Audit Fraud and corruption Working advance Procurement 22 7 Our observations and recommendations IFRC Head-quarter in Geneva IFRC Zone office Kuala Lumpur (Asia & Pacific Zone) IFRC Zone office Nairobi (Africa Zone) IFRC Regional delegation Nairobi Country Office Khartoum, Sudan National Society Khartoum, Sudan 65 1 (99)

3 7.7 National Society Kabul, Afghanistan 74 8 Desk-study IFRC delegation in Pakistan Background Reports Summary of outcome of the reports Summary of recommendations, action plan and follow-up Our assessment and recommendations based on the desk-study 96 Appendix Appendix 1 Appendix 2 Appendix 3 Terms of Reference List of interviews Organogram 3 a IFRC Head-quarter Geneva 3 b IFRC Asia Pacific Zone Office 3 c IFRC Africa Zone Office 3 d IFRC Regional Delegation Nairobi 3 e IFRC Country Office Khartoum, Sudan 3 f Sudanese Red Crescent Society 3 g IFRC Country Office, Kabul, Afghanistan 3 h Afghan Red Cross and Red Crescent Society 2 (99)

4 1 Executive summary Sida has awarded PwC the assignment to undertake a review of the internal control system at the Red Cross (IFRC International Federation of Red Cross and Red Crescent Societies). Sida undertakes this review as a part of following-up on Swedish Red Cross (SRC) funds, which are channelled through the IFRC, in order to ensure that these funds are handled in accordance with the requirements in the agreements and that the funds are used for the intended purposes. The main part of the assignment has been carried out at offices at all levels of the IFRC (Geneva, Nairobi, Khartoum, Kuala Lumpur and Kabul), as well as at the National Societies in Khartoum and Kabul. The aim of the review is to verify whether IFRC has reliable and relevant routines, resources and competence in order to be able to implement Sida s contributions. The review will assess whether the management and financial systems are in order, and shall provide recommendations for improvement. The assignment also includes a desk-study of the IFRC delegation in Pakistan following- up on a reporting of allegations of fraud and irregularities and of the actions taken. Below, we have summarized our assessments and observations on an overall level, based on the areas of focus in the Terms of Reference. For further descriptions and recommendations, we refer to the full report. Organization The International Red Cross and Red Crescent Movement is the world's largest humanitarian network. The Movement is made up of nearly 100 million members, volunteers and supporters in 189 National Societies. It has three main components comprising of The International Committee of the Red Cross (ICRC), The International Federation of Red Cross and Red Crescent Societies (IFRC) and 189 members Red Cross and Red Crescent Societies. The main office of the IFRC is located in Geneva. The IFRC Secretariat comprises of the head office and the field delegations around the world. There are five Zone offices located in Europe (Budapest), Africa (Nairobi), Americas (Panama), Asia Pacific (Kuala Lumpur), and Middle East-North Africa (Beirut). There are fourteen (14) permanent regional offices around the world, and more than 60 country delegations including representative offices in New York (to the United Nations), Addis Ababa (to the African Union) and Brussels (to the European Union). It is obvious that the organizational structure of the Movement and the Federation is extensive and requires a distinct and transparent organizational set-up. A decentralization of the regional and country desks to the Zones was implemented in During our review based on the Terms of Reference and the areas of internal control, we noted that the issue of transparency needs to be improved and clarified in regards to reporting lines, agreements and disclosure policies. The Federation is a large and complex organization with many layers of decision-making from Head-office, Zone office, Regional office and Country office. We note that Country offices are established where the National Society needs capacity support for a limited time in order to strengthen the National Society, however we see that many Country offices have been established for a long time (e.g. Country office in Khartoum). 1 (99)

5 We also note that the organizational set-up in the Federation in regards to reporting is that all departments at the head-quarters and the Directors of Zones are reporting directly to the Secretary General. Our assessment is that this constitutes a risk and might hinder transparency and accountability. See further paragraph 7.1 under observations and recommendations in the report. During the last two years, there has been a greater focus on risk management and anti-corruption work. An Accountability Framework was presented at the General Assembly in Sidney in November 2013, and there are indications of further work to be carried out with a Disclosure Policy, in terms of transparency and accountability. However, we note that the anti-corruption policy was launched in 2011 and there are still several areas for improvement in regards to implementing the policy within the organization in terms of anti-corruption work, establishing and ensuring compliance with routines and procedures, as well as clarifying dissemination of information to donors and stakeholders. See further paragraph under observations and recommendations in the report. Internal control system The internal control system at the IFRC is well established. The Federation has produced a large number of procedures and routine documentation for the organization. All regulations and procedures documents must be complied with by the Federation offices. However, we noted during our review that several documents has not been revised or updated for a number of years, which we recommend is being done on a continuous basis. IFRC regulations and procedures documentation are not an imperative for National Societies as being recipients of funding, hence they are able to set up their own systems for procedures and routines. However, according to the Cooperation Agreement, the National Societies are obliged to implement systems and routines to ensure efficient use of funds and implementation of activities. We note that there is no specific follow-up by IFRC on compliance with rules and regulations at National Societies level, which is mainly undertaken by local audits. We also note that the follow-up on recommendations made in local audit reports is not carried out in a systematic manner. In the Strategy 2020, one of the activities to enable the overall objectives is to build strong National Red Cross and Red Crescent Societies. In order to facilitate these activities, a specific self-assessment tool has been produced called OCAC (Organizational Capacity Assessment and Certification). This assessment tool was distributed within the organization during 2011 and is now in the process of being implemented. Before the OCAC tool was introduced, there were other assessment tools and formats being implemented, however these tools have since then been developed and made coherent within the movement. In regards to building capacity and support in the National Societies, it has been highlighted that there is lack of resources to carry out activities for capacity support, for which it is also difficult for the Federation to obtain support. Financial management systems Our overall assessment of the systems within the IFRC is that the systems are well established, integrated and facilitate reporting and access in several dimensions. It is noted that the IT-systems are regularly reviewed by the external auditors in order to assess appropriate systems. However, in regards to the logistics and procurement system (HLS), we note that this is only implemented and used at headquarters and 2 (99)

6 Zone offices. The system is not implemented at the Regional and Country offices, which indicates a weakness and risk in connection with procurements and logistics administrated and handled beyond the Zone office level. We have been informed that a new upgraded logistics system will be implemented, which will also include the Regional and Country offices. Accounting and handling of funds The accounting software used within IFRC is called CODA. CODA is a web-enabled transactional system that stores all financial information. IFRC Finance Department has established rules for account codes verification which are applied with the input of the documents in order to provide a certain level of control and to prevent incorrect usage of accounts. Until 2010, IFRC had multiple reporting systems in place which made it possible for National Societies to access information in CODA. In 2010, IFRC closed the DMR (Donor Monitoring Reporting) as it was producing misleading project reports because of the changes in accounting practices related to IFRS, which allowed IFRC to concentrate report development on a single platform and close direct access to the general ledger for non-ifrc parties. Our assessment is that the CODA system is well implemented and fully integrated with other supporting systems and platforms. All offices within the Federation have access to the accounting system and the accounting system serves as input to the output reporting generator Business Objects and the reports are tailored to ensure transparency and accountability. In regards to disbursement routines, we have several observations as regards both IFRC offices and National Societies. We note that, for instance, in some cases certain individuals authorize their own costs and advances. In regards to payment within the multilateral cooperation which takes place via the Federation these are executed either via the Working Advance (WA) or Cash Transfer System. WA is used when IFRC does not consider the capacity of the NS to be sufficiently strong. These payments can refer to both long-term support and emergency funds. We note that regulations for Working Advance National Society (WANS) are not complied with in full due to unsettled WANS. Working Advances to delegates and local staff are reported, to a large degree, in the same month in which they are paid out. However, there is an exception when new advances are added and not reported according to the time schedule stipulated in the regulations. Finance sends quarterly statements to personnel who have outstanding balances. See further paragraph 6.4 in the report for a description of working advance versus cash transfers. For National Society in Khartoum, Sudan, we note that the financial system, bookkeeping and follow up show weaknesses and it is difficult to assess the completeness of the bookkeeping. Due to this weakness, NS is under the Working Advance system. However, we note that a new accounting software was upgraded recently, which would facilitate improved accounting procedures and follow-up. The system is being implemented together with new routines and the training of personnel. HQ and all of the branches will be able, when the system is fully implemented, to use the same system. NS will, then, be able to produce consolidated accounts, which is not possible today. At the time of our visit, the bookkeeping in the accounting system was not up to date, rather, the registration continued in Excel and was reported in the accounting system after registration. In regards to the National Society in Kabul, Afghanistan, we note that the organization has a well-established organizational structure for the management and operation of the daily affairs of the organization and implemented policies and procedures. However, we also note areas as regards to internal control where there is room for improvement. It is noted that the bank accounts are single signatories only 3 (99)

7 and, in addition, the new accounting system needs to be further implemented and documentation and information management needs improvements in order to strengthen the internal control. Reporting and follow-up Monitoring and reporting is supported by a number of web-based systems, such as for the finance systems: CODA (accounting), Apple (software developed by IFRC), SAP (Human Resources), HLS (Logistics) and Business Objects (Reporting). Through these systems, the IFRC undertakes a global overview of income, expenditure, as well as legal commitments (staff contracts, procurement in progress, etc.) at all levels of the organization. In 2012, a new budget system, FedBudget, was finalized and introduced at all levels of the organization. FedBudget is linked directly with CODA and does not require any further input of data. Several reports are produced for monitoring and follow-up. Monthly financial and narrative reports are submitted by Country delegations and Regional offices to the Zone office. Quarterly financial reports are compiled at the Zone office and submitted to Director of Zone and IFRC Geneva. The Budget and Analysis Unit of the Geneva Finance Department reports on the IFRC Secretariat overall financial performance every month, and provides advice about corrective measures as required. The Federation publishes, on a monthly basis, data including global key performance indicators for Finance and Reporting. This is published on the Senior Management Dash Board on the International Federations intranet, FedNet, for increased transparency and awareness. Reporting to donors is produced on request if required, or donors receive the reports through access to FedNet and on the public website. We have made observations in regards the reporting between National Society and Country Offices. In our sample testing we note a lack of compliance with agreements between Country Office and National Society regarding the required reporting before the next disbursement in regards to working advance. See further chapter 7 under observations and recommendations in the report. In regards to evaluation and monitoring, the Planning and Evaluation Department have the responsibility of setting up structures and the framework for evaluation of activities within the Federation. The framework is to be applied to all evaluation activities by, or for, the IFRC Secretariat. Evaluations can be commissioned by a person or department in accordance with the evaluation standards and practices presented in this framework. This typically involves the programme senior management, or for evaluations involving multiple programme areas, there may be a requirement of the involvement of the Secretariat senior management. All executed evaluation reports are available on the IFRC external webpage. Audit and risk management Regulations and procedures in regards to the audit within the IFRC are handled by the Risk Management & Audit Department (RM&A).There is also an Audit and Risk Committee established as a sub-committee of the Finance Commission. However, the Audit and Risk Committee is not directly established under the Constitution. The Audit & Risk Committee reports to the Finance Commission on the activities, findings and the recommendations of the Audit and Risk Committee, Finance Commission include a report on the activities of the Audit and Risk Committee to the Governing Board and General Assembly. Furthermore, the chair of the Audit and Risk 4 (99)

8 Committee provides verbal reporting to the Governing Board at each ordinary meeting and has a standing invitation to attend all Governing Board Meetings. In addition the Chair of the Audit & Risk Committee meets with the President to report on activities of the ARC. The IFRC Internal Audit Process is regulated in the IFRC Internal Audit Charter (2009), which prescribes the mandate, authority, duties and reporting of the Risk Management and Audit Department (RM&A). With a right of access to the Federation Finance Commission and the Audit and Risk Committee, RM&A reports directly to the Secretary General as an independent function of the International Federation Secretariat. We note that the Internal Audit Charter presents a specific reporting structure which limits the transparency within the organization. Consequently, there are unclear reporting lines as regards to RM&A, as well as regards the General Secretary. It is important that the Internal audit (RM&A) works independently from the General Secretary in order to fulfil its obligations and independence. We also note that the IFRC needs to further develop its organization in regards to implementing the anti-corruption policy and needs to develop tools and reporting in relation to identified suspicions and investigations. It is unclear whether sufficient funds has been budgeted for the activities carried out in relation to anti-corruption work, which may limit the implementation and the additional work that needs to be followed-up and reported upon. Procurement and logistics Routines and regulations as regards Procurement are stipulated in the Procurement Manual. The Federation also refers to its external web-site, Procurement Portal. Procurement is understood to cover all actions related to the acquisition of goods, services, and capital items (including renting of equipment or facilities), from needs identification to supplier contract management. The International Federation is understood to include all secretariat offices (Geneva and field offices), regardless of location. We note some areas which need to be followed-up and further developed. We note that there is a weakness in ensuring that procedures in regards to procurement and logistics are adhered to. We also note that the organization is not completely adhering to the structure that should be in place, for instance that the Zone offices are handling the procurement. We note that the regional office in Nairobi is handling procurement and logistics, however this circumstance has also been identified by the head-quarters and will be attended to. We note, in regards to countries were no Legal Status agreement has been signed, that the Secretariat lacks the explicit permission to carry out legal acts in the Country and the legal enforceability of the IFRC acts and the applicable rules continue to comprise a risk. A Legal Status agreement is the explicit expression by a Government of their recognition of IFRC international legal personality and its corresponding ability to carry out legal acts in that Country and the terms and conditions under which IFRC can carry out such legal acts (for example, tax exemption, custom duty exemption, immunity from national legal processes and inviolability of staff and property). In countries where procurements are handled by the National Society, this implies a risk in terms of non-compliance with rules and regulations according to IFRC, and if no Legal Status agreement has been signed, there is also a risk of not being able to carry out legal acts, or securing the legal ownership of goods. 5 (99)

9 We also note in regards to the logistics and procurement system (HLS), that this is only implemented and used at headquarters and Zone offices. The system is not implemented at the Regional and Country offices, which constitutes a weakness in regards to internal control and compliance with rules and regulations. Anti-corruption and irregularities The Fraud and Corruption Prevention and Control Policy was implemented in Before this policy was implemented the Code of Conduct was previously the main document referring to fraud and other related subjects. The anti-corruption and prevention policy applies to the Federation, however, it is stressed that also members (National Societies) within the Federation should adhere to the anti-corruption policy together with the Code of Conduct and the Integrity Policy. We note that the Federation has focused its work more intensively within the area of anti-corruption during the last two years, still, we see that there are several areas for further improvement. We are informed that there is an annual process of attestation whereby all Senior Managers attest to any cases of fraud or irregularity, related party transactions and/or contingent liabilities. This is part of the internal control processes of the IFRC and forms part of the annual audit update. However, we have not been presented with any reporting of identified suspicions or irregularities within the Federation, with attached action plans and follow-up. There is no clear reporting line in regards the reporting of irregularities or fraud within the organization, as well as when to report to donors and other stakeholders. The majorities of the reported cases regarding deviations are made to the Human Resources and seem to refer mainly to staff matters. It is unclear to what extent reported cases refer to other areas indicating irregularities and fraud. There is no register presented with outstanding cases of suspicions and action plans. There is also a lack of routines to follow-up on compliance with rules and regulations in regards to National Societies funds transferred via the Federation. We note that there are different levels within the Federation as to how far the implementation has been carried out in regards to anti-corruption and risk management. In some cases, a risk register has not yet been completed and this includes only the financial aspects. IFRC delegation Pakistan (desk-study) Based on the reports and the information that we have been able to study and to which we have had access, there has been a chain of incidents and measures undertaken in regards to the IFRC Pakistan delegation. We note in the different reports that forms the basis for this desk-study that the first allegations in regards to the procurement process in Pakistan were highlighted during It has also been noted in the reports that during the period of (three years) there were several disasters in the region and it has been indicated that there were particular problems in regards to the procurement of goods and services. We note that it is crucial that the respective leadership groups within the National Societies implement and make staff and the organization aware of the anti-corruption policy. The implementation of the policy is, though, a weak link within the movement and for the Pakistan National Society it has been a challenge. We note that the IFRC Country Office in Pakistan does not have a Legal Status agreement with the government. This implies that all activities and formalities are carried out under the responsibility of the Pakistan National Society, and there is less control in terms of 6 (99)

10 local procurements. The process vis á vis the government has been ongoing for +20 years. We note, based on the reports and action plans that forms the basis for this deskstudy that the Pakistan National Society seems to have improved its organization in regards to implemented routines and regulations. The National Society implements projects and programs, and the IFRC country office is responsible towards the donors. MoU has been signed between the IFRC and the National Society. However, we note that, in spite of Procurement Officer be hired, this had not taken place as at the time of our review. Furthermore, capacity support needs to be increased to branches of the National Societies. We note that there are a number of procedures documents but, there is the need of improvements in regards to follow-up on compliance. Improved routines have been implemented and as from 2010, procurements in Pakistan are undertaken through the IFRC Country Office, as well as via the National Society, with the support of the IFRC. Medicine and food is handled via global framework agreements. When the National Society procures goods, this has to be carried out through IFRC and Geneva. The local Committee of Contract (CoC) comprises of representatives from both the National Society and the IFRC country office. Suppliers have to be registered in the IFRC register. Procurements in excess of CHF 50,000 are subject to secondary review to ensure compliance with Procurement Manual. In regard to the questions referred to in the Terms of Reference, based on this deskstudy we are not in the position to establish whether or not Sida funds have been used for the intended purposes for the periods referred to in the reports, which have been a part of this desk-study. However, based on the review of the reports and follow-up on actions taken, we have been able to assess the follow-up on actions taken and note that several actions have been implemented in response to the recommendations in the reports. However, we also note that there are still outstanding recommendations and actions to be taken, which need further attention in order to strengthen the internal control in the procurement process related to the Pakistan Delegation. See further chapter 8 in the report for further details. 7 (99)

11 2 Background 2.1 Assignment Sida has awarded PwC the assignment to undertake a review of the internal control system at the Red Cross (IFRC International Federation of Red Cross and Red Crescent Societies). Sida will undertake this review as a part of following-up on all Swedish Red Cross (SRC) funds, which are channelled through the IFRC, to ensure that these are handled in accordance with the requirements in the agreements and that they are used for intended purposes. The assignment shall take place in Sweden initially, but the main part of the assignment will be carried out in Afghanistan and in Sudan (National Societies), at IFRC zone offices in Kuala Lumpur and Nairobi and at IFRC headquarters in Geneva. The aim of the review is to verify whether IFRC has reliable and relevant routines, resources and competence in order to be able to implement Sida s contributions. The review shall inform the donor as to whether the management and financial systems are in order and shall provide recommendations for improvement. We have conducted our review in accordance with Terms of Reference for this assignment attached in Appendix Approach and methodology Method for the evaluation of financial governance Our approach and view of the system regarding financial governance and evaluation are based on the so-called COSO model (The Committee of the Sponsoring Organization of the Treadway Committee), which is an internationally well-tested and functioning framework for work within the areas of internal governance and control. Based on experience, the simplicity of the model provides the possibility; in the short term, to apply common viewpoints and terms within an area that can be considered difficult to define. In short, the COSO model can be said to be based on a system facilitating maintenance control procedures with the purpose of achieving good governance over operations including the reliable reporting of the results of the operations, as well as compliance with laws, ordinances, internal regulations and other guidelines and directives. The application of the model can be described as defining the activities within risk assessment existing within an organization, based on a given control environment. Based on the organization s risk assessment, the existing structure for internal governance and control is mapped in an appropriate manner. Finally, procedures for communication and information and the supervision exercised by the management body are assessed. The model shows how the components work together with regards to financial management and the accounting of the respective activities. 8 (99)

12 Below is an account of the fundamental activities we have executed within significant areas of the audit. Control environment verifies the conditions available for appropriate controls to be able to be applied. Risk assessment includes IFRC s system and procedures for the assessment of risks and threats in the operations. Control activity is a verification of the controls applied by IFRC in order to prevent the occurrence of errors and in order to discover errors that have occurred; for example, the monthly reconciliation of bank accounts. Information is an assessment of whether IFRC s systems and procedures capture, supply, and relay relevant information on what is taking place within the entire organization and if such information is supplied in an appropriate manner. Monitoring is a verification of the supervisory functions and follow-up efforts IFRC undertakes in order to satisfy itself that the operations are administrated efficiently. The great advantage of the model is that it not only focuses on the risk of error in the accounting, but it also includes a review of decisions and procedures for control over co-operating partners, new projects, and the overall outlook of the organization, as well as of the organization of internal control Confirmation of observations A draft report has been made available for fact checking and comments to IFRC and Sida with the purpose of ensuring that we have correctly understood and interpreted the systems and routines Structure of the report The structure of the report regarding the chapter on our observations and recommendations (Chapter 7), presents, for each section, a short overview on the present routines for each area, the information and documentation we have reviewed (according to Terms of Reference), what we have noted, and finally our recommendations. We have only reported on dissenting observations. If no dissenting 9 (99)

13 observations have been made in relation to that which has been reviewed, no comments are provided. The designations H (High), M (Moderate) as well as L (Low) at the end of each recommendation, specify the grade priority. High priority implies that the necessary measures should be taken immediately to address the findings which emerged during the audit of the management. Moderate priority implies that the findings that emerged during the audit of the management should be addressed within six months. Low priority implies that the findings that emerged during the audit of the management should be attended to within one year. 2.3 Method The review is based on the material and documentation received from Sida, Swedish Red Cross (SRC), IFRC in Geneva, IFRC Zone offices in Kuala Lumpur and Nairobi, IFRC Regional office in Nairobi, IFRC Country Office in Khartoum, National Society in Khartoum and National Society in Kabul. Interviews and meetings with personnel at Sida and within the different levels of IFRC and National Societies have been conducted. During the review, we were presented with all relevant documentation requested, however due to specific internal rules and regulations as regards the dissemination of internal reports, there has been a number of documents that we have not been able to study. We do not see that this specific situation has affected our review, assessments and observations. Field visits have been carried out during November December 2013 at all offices mentioned above. For more detailed information on interviews/meetings, see Appendix (99)

14 3 The Red Cross Movement 3.1 About the Red Cross Movement The International Red Cross and Red Crescent Movement is the world's largest humanitarian network. The Movement is made up of nearly 100 million members, volunteers and supporters in 189 National Societies. It has three main components comprising of The International Committee of the Red Cross (ICRC), The International Federation of Red Cross and Red Crescent Societies (IFRC) and 189 recognized National Red Cross and Red Crescent Societies. 3.2 About the Federation (IFRC) The International Federation of Red Cross and Red Crescent Societies (IFRC) is a global humanitarian organization coordinating and directing international assistance following natural and man-made disasters in non-conflict situations. Its mission is to improve the lives of vulnerable people by mobilizing the power of humanity. Founded in 1919, the IFRC is a member organization composed and governed by the 189 member Red Cross and Red Crescent National Societies, a secretariat in Geneva and more than 60 delegations strategically located to support activities around the world. The Federation is guided by its Strategy The IFRC works with National Societies in responding to catastrophes around the world. Its relief operations are combined with development work, including disaster preparedness programmes, health and health care activities, and the promotion of humanitarian values. The headquarters of the IFRC are in Geneva. There are five Zone offices are located in Europe (Budapest), Africa (Nairobi), Americas (Panama), Asia Pacific (Kuala Lumpur), and Middle East-North Africa (Beirut). There are fourteen (14) permanent regional offices around the world. There are more than 60 country delegations around the world including representative offices in New York (to the United Nations), Addis Ababa (to the African Union) and Brussels (to the European Union). 3.3 About the member organizations National Societies There are 189 National Red Cross and Red Crescent Societies around the world. This unique network forms the backbone of the International Red Cross and Red Crescent Movement. Each National Society is made up of volunteers and staff providing a wide variety of services, ranging from disaster relief and assistance to war victims, to first aid training and restoring family links. The National Societies work in the humanitarian field to support the public authorities in their own countries and do this as independent auxiliaries to the government. Their local knowledge and expertise, access to communities, and infrastructure enable the Movement to secure the right kind of help where it's needed, fast. 11 (99)

15 The Swedish Red Cross (SRC) The Swedish Red Cross (SRC) is a non-profit organization, founded and recognized in 1865 by the International Committee of the Red Cross (ICRC), and has been a member, since 1919, of the International Red Cross Movement, which consists of 189 National Societies, the International Federation of Red Cross and Red Crescent Societies (IFRC) and the ICRC. SRC is recognized by the Government of Sweden as the only National Red Cross or Red Crescent Society of Sweden. SRC must be, and is, compliant with Articles 3 (National Red Cross and Red Crescent Societies) and 4 (Conditions for recognition of National Societies) of the Statutes of the Movement. SRC s international capacity building programmes consist of long-term partnerships with National Societies. The emergency programmes comprise global responses to humanitarian disasters. In 2011, SRC s responses to IFRC s emergency appeals constituted approximately 29 percent of the total Sida funding for both long term humanitarian capacity building and emergency appeals. SRC also delegates supports multilateral and bilateral long-term capacity building programmes and emergency programmes for SRC, IFRC and ICRC. The table below shows a summary of total income for SRC for 2012 and 2013, as well as disbursements to IFRC and National Societies. Income/disbursements 2012 MSEK 2013 MSEK Total funds received from Sida 238,0 206,6 Total disbursed bilateral programmes 37,1 32,7 Total disbursed IFRC 173,3 196,8 Total disbursed ICRC 20,0 23,6 12 (99)

16 4 Constitution and Rules and Procedures 1 IFRC has compiled its statutory documents in the booklet Statutory texts of the International Federation of Red Cross and Red Crescent and Red Crescent Societies, adopted by the 16 th Session of the General Assembly (Geneva, November 2007). The booklet includes the following areas: Constitution Rules of Procedures Financial regulations Staff rules Rules for travel assistance In addition to these statutory documents, there is also a diverse regulatory framework applicable to IFRC and National Societies (NS), which has been adopted by the Movement and is entitled Governance Structures and the Federation Governance Structures. The soft and hard obligations within this framework are binding on National Societies. They include the Integrity Policy, and the Principles and Rules for Humanitarian Assistance, which contains rules and regulations concerning accountability, fraud and corruption, and similar areas Bodies of the International Federation There are four Statutory Bodies of the International Federation which are: The General Assembly The Governing Board The President The Secretary General Constitutional Commissions and Committees The Constitutional Commissions and Committees of the International Federation are: The Finance Commission The Youth Commission The Compliance and Mediation Committee The Election Committee Finance of the International Federation The section for Finance of the International Federation refers to the following articles: Finances and property 1 Statutory texts of the International Federation of Red Cross and Red Crescent Societies (IFRC), (99)

17 Financial contributions Budget Audit 4.2 Rules of Procedures The general object of the Rules and Procedures is to ensure the implementation of the Constitution of the IFRC. These Rules shall regulate the work of all bodies of the IFRC, established either by the Constitution or by a statutory body of the IFRC. Rules and Procedures include the following sections: General provisions Admission and membership of National Societies General Assembly Elections Governing Board and Secretary General Finance Commission Youth Commission Regional Conferences Advisory bodies Financial regulations Final provisions 4.3 Financial regulations These regulations govern the financial administration of the IFRC. The Secretary General is responsible for the financial administration of the IFRC in accordance with these Regulations and shall establish such rules and internal procedures as are deemed necessary. The Financial regulations include the following regulations: Applicability The financial year The budget Annual contributions Resources and funds Custody of funds Investment of funds Risk management and internal control Insurance and losses The accounts Financial statements Management reporting Independent audit Internal audit and risk management Delegation of authority General provisions 14 (99)

18 5 IFRC Financial Management systems 5.1 General 2 IFRC has set up a financial management system supporting a wide range of services delivered to IFRC members and other stakeholders. This system incorporates accountability requirements which vary for different stakeholders. The IFRC is designed to be flexible and sustainable in support of the IFRC s essential services and commitments to stakeholders. The IFRC s financial management system is based on four key factors: The Constitution The Financial Regulations International Financial Reporting Standards (IFRS) Market factors (for example donor requirements and the demand for supplementary services requested by members) Income sources The IFRC generates the majority of its usual income from three sources: 1. Statutory contributions (National Society membership fees) National Society, who are recognized members of the IFRC, pay an annual statutory contribution. The total quota is fixed, but the contribution varies for each NS and is determined by a formula, approved by the General Assembly, which considers factors such as the NS income and the UN quota for the country in question. Annual income amounts to 36 million Swiss Francs. Major areas of expenditure are governance and the Secretariat s support to governance, humanitarian values and diplomacy, National Society knowledge development, policy and programme development and related management support services and structures. Income from statutory contributions also supports IFRC zone and regional structures in the Middle East and North Africa, Europe, Asia Pacific, Africa and the Americas. These expenditures support regional IFRC service delivery of network-wide priorities, which are adapted to serve the local needs of National Societies. 2. Voluntary contributions Voluntary contributions are funds the IFRC receives to deliver humanitarian and development programmes, and to coordinate responses to disasters. Voluntary contributions represent the largest source of income to the IFRC and amount to an annual average income of 250 million to 500 million Swiss Francs. Major areas of expenditure are the coordination of international disaster relief operations, disaster risk reduction, health and social development-related 2 The Way We Finance An overview of our financial architecture (IFRC 2013) 15 (99)

19 activities, customized technical support to National Society programmes including capacity building and organizational development. 3. Supplementary services fees (charged on a cost-recovery basis) Refers to supplementary services to National Societies or partners, such as rental of a vehicle or access to shared office space, that are delivered by IFRC. These services are invoiced on a full cost-recovery basis, which includes indirect costs. The IFRC does not make any profit on the service fees charged. Major areas of expenditure are the vehicle fleet, procurement and warehousing, local office premises and support service provision. National Societies and other partners in-country look to the IFRC to provide supplementary services as the IFRC is generally able to negotiate more competitive prices with suppliers, and enjoys legal status as an International Organisation. Annual average income amounts to 25 to 50 million Swiss Francs. Programme overhead For each programme funded by voluntary contributions, indirect expenses (i.e. overheads) are recovered by a programmes and services support recovery (PSSR) cost comprising 6.5% of the total programme budget. PSSR covers administrative and programme support costs which the IFRC incurs in supporting, monitoring and/or implementing a programme on behalf of a funding partner, such as programme quality control and coordination, human resources, information technology, audit, finance, communications and legal. For programmes within the humanitarian sector (United Nations, development agencies, etc) PSSR costs are, on average, 7%. An extra percentage of overheads are charged when funds are ear-marked and require additional reporting. 5.2 Overview financial systems IFRC has a number of integrated systems in order to ensure accountability and meeting the varying requirements of different stakeholders. We have summarized below the main systems that have been part of this assignment in regards to follow-up and assessment Accounting system - CODA The accounting software used within IFRC is called CODA. CODA is a web-enabled transactional system handling and archiving all financial information. IFRC Finance Department has established rules for account codes verification that are used for the input of documents in order to provide a certain level of control and to prevent incorrect use of accounts. CODA accounting software is also complemented with CODA XL, which is a Microsoft Excel ad-in that makes CODA functionality available within Microsoft Excel, and provides users with the various solutions for input, enquiry and reporting. Until 2010, IFRC had multiple reporting systems in place: corporate standard Business Objects system and bespoke DMR/FMR sites based on old version of Microsoft Analysis/Reporting Services which was not maintained. In 2010 IFRC closed the DMR (Donor Monitoring Reporting) as it was producing misleading project reports because of the changes in accounting practices related to IFRS. In addition to this, DMR also had a security flaw that allowed the general public to openly browse IFRC general ledger, including salaries and other classified information. A decision was taken to keep Business Objects and close the DMR/FMR 16 (99)

20 sites. This allowed IFRC to concentrate report development on a single platform and close direct access to the general ledger to non-ifrc parties Other financial and reporting systems APPLE Appeal and Pledge APPLE (Appeal Pledge) is a web-based on-line system used to maintain master data for Appeals, Projects, Pledges, Suppliers and many other codes. All cash-pledges are registered in APPLE at IFRC head-quarter in Geneva. Fed Budget Fed Budget is the Excel based Federation Budgeting system that can be accessed directly at the respective delegation. In 2012, the new budget system Fed Budget was finalised and introduced at all levels of the organisation. Fed Budget ties directly into CODA and does not require any further input of data. SAP Human Resources (HR) system SAP is a HR system that includes all documentation as regards staff and staff regulations and documentation. HLS Humanitarian Logistics Software The Humanitarian Logistics Software (HLS) is used by the IFRC Global Logistics Services (GLS) for procurement and mobilisation of goods. The system is accessible and used at the headquarters in Geneva and at the Zone offices. The system is not implemented or used at Regional and Country offices within the Federation. Business Objects Business Objects is a reporting system and feeds into the different input systems. Specific reports are built in order to meet requirements from donors and other stakeholders. The Finance Department at the headquarters in Geneva is responsible for building report formats in the system. 17 (99)

21 6 General descriptions of procedures and routines In regards to the Terms of Reference, there are several areas involving procedures and routines which were included in the review. Certain general procedures and routines for the IFRC organization and its offices have been summarized below, and apply to the different offices being part of this review as described in chapter 7. Observations and recommendations in regards are presented in the following chapters. 6.1 Agreements There are several types of contracts and agreements signed in the chain from Sida to the implementing project. The basis for the cooperation is stipulated in the agreement between Sida and the Swedish Red Cross. Next in the chain of agreements is the framework agreement between the Swedish Red Cross (SRC) and IFRC, which together with the signed Cash Pledge, regulates the cooperation between the parties. The IFRC pledge manager is the project or appeal manager responsible for the management of the pledge. This individual should be contacted by the donor on issues related to project or appeal implementation. The information in the Cash Pledge regulates the follow-up and reporting from IFRC to the donor, referring to earmarked or non-earmarked funds. A Cooperation Agreement/Memorandum of Understanding (MoU) is signed between IFRC, ICRC and the National Society to establish operational arrangements in a given country. Furthermore, a Coordination Agreement/Project agreement is signed between IFRC and the National Society which regulates the specific programme/project in respect to objectives, results and budget, funding/ implementing period, project manager, mechanism of funding and reporting etc. In relation to legal status for the IFRC to undertake operations in a specific country, a Legal Status Agreements is signed between the IFRC and the local authority/ government in respective country, and is signed by the Secretary General. A status agreement is the explicit expression by a Government of their recognition of the IFRC international legal personality and corresponding ability to carry out legal acts in that specific Country and the terms and conditions under which IFRC can carry out these legal acts (for example, tax exemptions, custom duty exemptions; immunity from national legal processes and inviolability of our staff and property). 6.2 Audit Regulations and procedures in regards to audit and risk management within the IFRC are handled by the Risk Management & Audit department (RM&A). Below is a summary of the internal guidelines as regards to internal and external audit. Audit & Risk Committee The Audit and Risk Committee was established as a sub-committee of the Finance Commission. The Audit and Risk Committee is not directly established under the Constitution. 18 (99)

22 The duties for the Audit and Risk Committee are: to assess the scope and effectiveness of the systems established by management to identify, to assess, manage and monitor financial and non-financial risks, to monitor and assess the role and effectiveness of the internal audit function, to review and monitor the content and quality of the external auditor s management letter, and to monitor the follow-up recommendations made. The composition of the Audit & Risk Committee is the following; Two Finance Commission Members One National Society Secretary General One former IFRC Secretary General One National Society Director of Internal Audit One external Finance Professional The Audit & Risk Committee reports to the Finance Commission on the activities, findings and recommendations of the Audit and Risk Committee. The Finance Commission includes a report about the activities of the Audit and Risk Committee to the Governing Board and General Assembly and the chair of the Audit and Risk Committee provides verbal reports to the Governing Board at each ordinary meeting, and has a standing invitation to attend all Governing Board Meetings. The internal audit, referred to as The IFRC Internal Audit Process, is specified in the IFRC Internal Audit Charter (2009) which prescribes the mandate, authority, duties and reporting of the Risk Management and Audit Department (RM&A). With a right of access to the Federation Finance Commission and the Audit and Risk Committee, RM&A reports directly to the Secretary General as an independent function of the International Federation Secretariat. The activities are outlined in the RM&As Annual Audit Plan, based on a comprehensive risk assessment of all the Federation Secretariat activities, programmes and processes. The plan is agreed by the Audit and Risk Committee and approved by the Secretary General prior to its implementation. Internal audit is regulated in the Internal Audit Charter. This Charter constitutes the framework for the RM&A function of the IFRC and establishes its mission: to provide high quality audit service that gives management reasonable assurance on the effectiveness of the Federation's internal control environment and to act as an agent for change by making recommendations for continual improvement, thus providing assurance and assistance to management and staff in the effective discharge of their responsibilities and the achievement of the Organization's mission and goals. The purpose of this Charter is also to strengthen accountability, stewardship and corporate governance in the Organization. The Head of Risk Management and the Audit Department of the Federation is responsible to the Secretary General and is part of the Federation staff. The Internal Audit Charter also regulates the reporting and working relationships for Governance and Management. External audit The IFRC consolidated financial statements are audited annually by an international external audit firm. As part of the annual audit plan, RM&A also initiates own external audits of major emergency appeals, and provide support to member National Societies by providing guidance on external audits. 19 (99)